Given the headlines surrounding financial scandals, eye-watering fines levied by regulators, the threat of extradition or being roasted by a House of Commons Select Committee, now is a good time to engage with the key stakeholders of D&O insurance: the senior executives of large corporates who face exposure to these kinds of liabilities. But it is surprisingly difficult to find engagement at that level within major corporates.
‘A flaw in the purchasing process’
Perhaps part of the explanation for this lack of engagement may lie in the fact that there have been relatively few instances of company directors appearing handcuffed in the dock or being subject to bankruptcy or disqualification proceedings. Indeed, it is fair to say that UK domestic law (absent insolvency) operates in a relatively benign manner for directors and affords them generous statutory and common law protections. Even the sabre rattling by various regulatory and prosecuting authorities is often not matched by the reality. For example in 2010/11, some 35 UK directors were found guilty of Health and Safety offences, 7 of which involved fatal accidents. Of these, none were imprisoned and fines range from between £15,000 to £30,000.
I’m not convinced though that the main cause of this seemingly lack of concern is ignorance or a false sense of security. After all, corporate lawyers, accountants and other consultants have spent much time and earned plenty of fees, in recent years, educating UK plc about the multi-jurisdictional threats it faces. There is no lack of material to draw upon, ranging from bribery and corruption investigations to market rigging, from tax avoidance and breach of securities laws to pollution, death and personal injury and from cyber threats to sudden disastrous reputational damage.
No, I don’t think there is a lack of interest among senior executives about any of these exposures. Instead I think the cause of the lack of engagement phenomenon is more subtle; it relates to a flaw in the purchasing process. In many large companies, D&O insurance is treated in the same way as other classes of insurance. Decisions as to the nature, size and content of the programme are usually delegated to the insurance purchasing and/or procurement function for the company as a whole, where cost is often the main driver of purchasing decisions.
Who should be insured?
Renewal terms are sought and obtained from the market along with assurances as to the breadth of cover. Of course “broad cover” may mean one thing to the company but something quite different to the individual directors and officers. An easy illustration of this is the threshold question: who should be insured under a D&O policy? From the company’s point of view, it might wish to see a very broad definition, perhaps extending to all employees as well as to the company itself, since this would maximise the company’s prospects of recovery from insurers in the event of a claim. The directors on the other hand might, selfishly but nonetheless reasonably, want a narrower definition of the class of insureds on the basis that they might not wish to dilute their limit of cover (under what is after all called a directors and officers liability policy) among a large pool of potential beneficiaries. There are a variety of other similar issues which arise at the point of purchase and, if not conflicts, then at least create tensions in the buying process. Issues such as:
- the need to dovetail D&O insurance with company indemnification
- who controls the purse strings
- the extent to which the policy is a balance sheet protection for the company as well as, or instead of, personal protection for senior executives
These could all have potentially different outcomes depending on who is addressing them.
To make matters worse, by the time the decision making process in relation to the renewal of a D&O programme is escalated up to board level, there is often only very limited time for debate. Not infrequently, questions are limited to “am I covered?” and “for how much and with which insurers?” When one delves into this a little more deeply, one also encounters quite different cultures within different companies. Some companies take the view that it is for the board to dictate to the managers, on a top down basis, what their expectations are with respect to D&O insurance. Others believe that since it is the company which is paying for the insurance, they should perhaps consider themselves lucky to get what they are given.
Do companies need a D&O guru on the board?
In my previous career as a solicitor in private practice, the decision-making and purchasing process around professional indemnity insurance was delegated by the management board to one of the senior partners who was experienced in the ways of the insurance market and knew precisely what cover to look for and with which carriers. Whilst cost and amount of cover were important, so was the quality and above all, the terms of and breadth of the coverage throughout the tower of insurance. The delegated partner was in effect the professional indemnity guru for the firm. There is no such equivalent for large corporates when it comes to D&O liability insurance, although perhaps the GC or company secretary may assume a de facto responsibility for this function.
The final nail in the coffin of clarity and transparency on the question of D&O cover is often supplied by the insurance industry itself. D&O has become unnecessarily complicated. A typical policy can run to some thirty pages. This complexity when added to the competing priorities in the buying process and a lack of time for informed debate at board level, perhaps combine to form the real reason why it is difficult to secure engagement among the stakeholders for D&O. Perhaps part of the solution may be to consider delegating specific authority for the buying of this class of insurance to the General Counsel, Company Secretary or other senior executive. Another part of the solution might be to empower the directors by giving them a script with which to ask searching and relevant questions about the cover. Finally, a simplified and streamlined policy wording may assist in delivering clarity as to what is actually covered. Until we stimulate discussion among the stakeholders of this class of insurance as to what it is they really need, it will always remain a challenge for the insurance industry to try to meet that need.